[Federal Register Volume 81, Number 250 (Thursday, December 29, 2016)]
[Notices]
[Pages 96146-96149]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31472]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79655; File No. SR-NSCC-2016-008]


Self-Regulatory Organizations; National Securities Clearing 
Corporation; Notice of Filing of Proposed Rule Change To Reflect 
Updates to the Consolidated Trade Summary, Eliminate Re-Pricing in the 
Foreign Security Accounting Operation and Make Other Changes

December 22, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 
1934, as amended (``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is 
hereby given that on December 15, 2016, National Securities Clearing 
Corporation (``NSCC'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
clearing agency. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Clearing Agency's Statement of the Terms of Substance of the 
Proposed Rule Change

    The proposed rule change consists of amendments to NSCC's Rules & 
Procedures (``Rules'') \3\ in order to (i) reflect updates that NSCC 
would make to the Consolidated Trade Summary (referred to herein as the 
``CTS'' and as the ``CTSs'' for more than one CTS), which is provided 
to Members and contains summarized trade obligation information, and 
(ii) eliminate the practice of re-pricing in the Foreign Security 
Accounting Operation. The proposed rule change would amend the 
following Rules: (i) Procedure II, Section H (Consolidated Trade 
Summaries), (ii) Procedure V, Section C (Net Balance Orders) and 
Section E (Consolidated Trade Summaries), (iii) Procedure VI, Section A 
(Introduction), Section B (Trade-for-Trade Foreign Security Receive and 
Deliver Instructions), and Section C (Netted Member-to-Member Receive 
and Deliver Instructions) and (iv) Procedure VII, Section B 
(Consolidated Trade Summary), as described in more detail below. In 
addition, the proposed rule change would make technical changes to 
clarify and correct certain provisions of the foregoing Rules, as 
described in greater detail below.
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    \3\ Capitalized terms not defined herein are defined in the 
Rules, available at http://dtcc.com/~/media/Files/Downloads/legal/
rules/nscc_rules.pdf.
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II. Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

    In its filing with the Commission, the clearing agency included 
statements concerning the purpose of and basis for the proposed rule 
change and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. The clearing agency has prepared summaries, 
set forth in sections A, B, and C below, of the most significant 
aspects of such statements.

(A) Clearing Agency's Statement of the Purpose of, and Statutory Basis 
for, the Proposed Rule Change

1. Purpose
    The current CTS \4\ output consists of a main file and two 
supplemental files as well as an additional file that reflects 
transactions in Foreign Securities.\5\ The

[[Page 96147]]

CTS is issued to Members as an iterative report three times a day: 
Beginning with the main CTS, which is issued at approximately 21:00 ET, 
then the first Supplemental CTS, which is issued at approximately 24:00 
ET, and finally, the second Supplemental CTS, which is issued the 
following business day at approximately 12:00 ET. Each iteration of the 
CTS contains the same type of summarized trade obligation information, 
however, depending on the time of day the iteration of the CTS is 
issued, it may be referred to as the ``Consolidated Trade Summary'' (or 
``CTS'') or a ``Supplemental Consolidated Trade Summary.'' Furthermore, 
any information contained in a prior CTS does not appear again in any 
successive CTS, including any later Supplemental CTS.\6\
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    \4\ The CTS is described in Procedure II (Trade Comparison and 
Recording Service), Procedure V (Balance Order Accounting Operation) 
and Procedure VII (CNS Accounting Operation).
    \5\ The Foreign Securities file is a transaction file reporting 
Foreign Securities trades as received. The transactions are netted 
in the foreign netting process to become balance orders, which are 
reported on the CTS. The current CTS reports the netted summary 
records and balance orders on T+1. The revised CTS would report 
Foreign Securities trades on trade date. The revised CTS will report 
both foreign and domestic netted transactions and the associated 
balance orders. By consolidating the Foreign Securities file and CTS 
files, Members would have only one file to support.
    \6\ The trade obligation information in the CTS is Member-
specific; it is not anonymized.
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    NSCC held numerous industry meetings in order to give Members an 
open forum to express their ideas about changes that are needed to the 
CTS. In order to address the Member feedback it received, NSCC would, 
with this proposed rule change: (1) Consolidate the file layouts into 
one common file layout, (2) provide more details in the revised CTSs, 
(3) discontinue a current output format (print image) and introduce a 
more user-friendly format (referred to as comma separated value or 
``CSV'') and an online query tool, (4) simplify the terminology in the 
Rules by referring to each iteration of the CTS as the ``Consolidated 
Trade Summary'' (instead of the way in which the Rules are currently 
drafted to refer to a ``Consolidated Trade Summary'' and a 
``Supplemental Consolidated Trade Summary''), and (5) discontinue the 
Foreign Securities transaction file because information contained in 
that additional file would be reflected in the revised CTSs, each of 
which is described below.
(i) Changes to the CTS and Technical Changes to the CTS-Related Rules
    First, the proposed rule change would consolidate the file layouts 
of the current CTSs into one common file layout that would be used for 
each of the three CTSs that are issued each day. Currently, each of the 
main CTS file, the supplemental CTS file, and the Foreign Securities 
file has its own individual file layout. NSCC would consolidate these 
multiple file layouts into one common file layout in the revised CTS 
file. Having one common layout in the revised CTS would eliminate the 
need for Members to maintain coding for multiple file layouts.
    Second, the proposal would update the CTS output file layout to 
provide Members with additional transparency and clarity regarding 
their trade summary, balance orders and receive and deliver 
instructions, which would help with reconciliation. For example, the 
current CTS output file layout specifies if a security is a CNS 
security or a non-CNS security but does not further clarify the non-CNS 
obligations as guaranteed or not guaranteed. Under the proposal, the 
CTS output file layout would be expanded to include a field for the 
guarantee/not guarantee designation to clearly indicate to users 
whether a trade obligation is guaranteed or not guaranteed. Other 
examples of new fields that would be added include: (1) Netting type to 
describe whether netted (e.g., multilaterally netted or bilaterally 
netted) or trade-for-trade instructions resulted, and (2) a net reason 
code to add clarity as to the netting type.
    Third, Members have also expressed interest in having NSCC change 
the current file format of the CTSs, which are currently available in 
print image format and machine-readable (``MRO'') format. As a result, 
NSCC would discontinue the current print image format while maintaining 
the current MRO format and would also introduce an online query tool. 
The print image format would be replaced by CSV which can be downloaded 
into spreadsheet programs. In addition to the three iterations of the 
CTS that would continue to be distributed to Members, Members would 
also be able to use a new online query tool to search information and 
create their own custom data view and custom reports. The new online 
query tool would enable users to research information that has been 
previously distributed in a CTS. Members have expressed interest in 
this change in file formats and the online query tool which allows 
results to be downloaded to spreadsheet programs.
    Fourth, from a Rules perspective, the terminology in Procedure II, 
Section H, Procedure V, Section E and Procedure VII, Section B would be 
revised, so that each CTS would be referred to as the ``Consolidated 
Trade Summary'' and more than one CTS would be referred to as the 
``Consolidated Trade Summaries.'' The proposed rule change would 
eliminate references to alternate terminology such as ``Supplemental 
Consolidated Trade Summary,'' ``Supplemental Consolidated Trade 
Summaries,'' and ``CTS.'' In addition, conforming changes would be made 
to Procedure V, Section C and Procedure VII, Section B to add phrases 
and terms such as ``next available,'' ``applicable'' and ``prior'' 
before references to ``Consolidated Trade Summary.'' Additional 
technical changes would be made to clarify that the CTS would continue 
to be issued to Members three times a day and would continue to be non-
cumulative; these changes would apply to Procedure II, Section H, 
Procedure V, Section E and Procedure VII, Section B. Procedure VII, 
Section B would also be amended to reflect the change in output format 
of the Consolidated Trade Summaries (specifically, because the print 
image format is being discontinued and the CSV format is being 
introduced, the Rules and terminology must be changed to use 
terminology consistent with the different format).
    Fifth, the Foreign Securities transaction file would be 
discontinued. Information that is currently in this additional file 
would be reflected in the revised CTSs.
    NSCC would continue to issue the CTSs to Members three times a day, 
at approximately the same intervals as it does today.\7\ The revised 
CTSs would continue to be iterative (i.e., any information that 
appeared on prior CTSs would not appear again on any successive CTSs), 
and also continue to be available in MRO format.
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    \7\ The header of the CTS output file would indicate whether the 
CTS is for Cycle 1 (i.e., the one issued at approximately 21:00 ET), 
Cycle 2 (i.e., the one issued at approximately 24:00 ET) or Cycle 3 
(i.e., the one issued at approximately 12:00 ET on the next business 
day).
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(ii) Discontinuation of the Re-Pricing of Foreign Securities and 
Technical Clarifications/Corrections to Procedure VI (Foreign Security 
Accounting Operation)
    Based on Member feedback, NSCC is also proposing to update the code 
associated with NSCC's Foreign Security Accounting Operation, which 
receives and processes Foreign Securities traded over-the-counter and 
settled in U.S. Dollars.\8\ The current foreign netting process 
aggregates Foreign Securities obligations, bilaterally nets these 
obligations and then re-prices these obligations using a uniform 
Settlement Price. As further explained below, NSCC is proposing to no 
longer re-price these Foreign Securities obligations.
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    \8\ See Procedure VI (Foreign Security Accounting Operation).
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    By way of background, Members often settle their Foreign Securities 
trades bilaterally in the local market prior to receiving the main CTS 
(which contains netted obligations marked to market

[[Page 96148]]

using the uniform Settlement Prices of such Foreign Securities). There 
is, therefore, a timing mismatch between the Members' settlement of 
Foreign Securities trades that are executed in U.S. Dollars and the 
distribution of the CTS to Members by NSCC. Currently, NSCC re-prices 
these Foreign Securities at the uniform Settlement Prices, creating 
potential cash adjustments that are not guaranteed by NSCC. For 
example, assume there are 10 trades of a Foreign Security which have 
been executed at different contract prices between Member A and Member 
B. First, these 10 trades are aggregated by NSCC so that there is a net 
buy obligation and a net sell obligation between Member A and Member B. 
The Foreign Securities trades may have been executed at different 
contract prices, so, today, NSCC applies the uniform Settlement Price 
to the netted buy obligation and the netted sell obligation. Re-pricing 
can create a cash adjustment for Members; this cash adjustment is not 
guaranteed by NSCC and is a concern for Members. For example, if a 
Member's respective counterparty in a trade becomes insolvent, then the 
solvent Member is liable for the cash adjustment because it is not 
guaranteed by NSCC. With this proposed rule change, the cash adjustment 
and the associated risk due to re-pricing would be eliminated, as 
requested by Members.\9\
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    \9\ A cash adjustment due to netting, however, is still 
possible, and would continue to be not guaranteed; this cash 
adjustment occurs because of the cash differences due to the netting 
process. A cash adjustment due to netting would arise, if, for 
example, Member A sold 5 shares of Security X for $20 and Member B 
bought 5 shares of Security X for $10. In this case, the shares 
would net out to zero, but there would be a cash adjustment of $10.
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    Foreign Securities would continue to be bilaterally netted, but 
would no longer be re-priced at uniform Settlement Prices. Instead, 
they would be bilaterally netted at their contract prices to eliminate 
the risk of a cash adjustment (which is not guaranteed by NSCC) due to 
re-pricing.
    To effectuate this proposed change, NSCC proposes to remove 
language in Procedure VI, Section C that permits NSCC to establish a 
uniform Settlement Price and calculate any related Foreign Security 
Clearance Cash Adjustment associated with the re-pricing. Unlike the 
underlying Foreign Securities transactions (which are settled in the 
local markets and not at NSCC), the payments of any Foreign Security 
Clearance Cash Adjustment (whether due to netting or re-pricing) 
related to those underlying Foreign Securities transactions are made 
through NSCC today and under the proposed rule change, this would 
continue to be the case with respect to Foreign Security Clearance Cash 
Adjustments that arise due to netting. The proposed rule change would 
revise the language in Procedure VI to clearly state that the failure 
of a Member to make payment of the Foreign Security Clearance Cash 
Adjustment with NSCC will cause NSCC to reverse all such cash 
adjustment debits and credits (rather than generally stating this would 
be caused by the failure to ``make settlement with the Corporation''). 
The proposed rule change would further clarify that neither the 
settlement of the underlying transaction nor the payment of the related 
Foreign Security Clearance Cash Adjustment would be guaranteed by NSCC 
(which is also the case today).\10\
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    \10\ Under the proposed rule change, only a Foreign Security 
Clearance Cash Adjustment due to re-pricing would be eliminated. A 
Foreign Security Clearance Cash Adjustment due to netting is still 
possible, so this Procedure is still applicable to such Foreign 
Security Clearance Cash Adjustments.
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    Additional clarifying changes to Procedure VI include revising the 
reference from ``T+2'' in Section B to ``SD-1'' because Foreign 
Securities transactions are not always settled on T+3 (according to 
local market practices) and thus, are not always compared on T+2, as 
Section B of Procedure VI states. Therefore, using Settlement Date 
(i.e., ``SD'') as the reference point is more appropriate. Furthermore, 
Foreign Securities transactions are reported on the CTSs, which are 
Settlement Date-based. In addition, in Section C, ``produced'' would be 
revised to ``reported,'' because ``reported'' more accurately describes 
what occurs today--that is, NSCC reports the netted Member-to-Member 
receive and deliver instructions. In addition, the proposed rule change 
would make the following corrections: (i) The reference in Section C to 
``Foreign Security Clearing Cash Adjustment'' would be revised to the 
correct term, ``Foreign Security Clearance Cash Adjustment'' and (ii) 
the cross-references to ``Section II'' and ``Section IV'' in Section A 
would be replaced with references to ``Procedure II'' and ``Procedure 
IV,'' respectively.
Implementation Timeframe
    The proposed rule changes would become effective by July 14, 2017. 
After Commission approval of the proposed rule changes, a legend would 
be added to each of Procedures II, V, VI and VII stating that there are 
approved but not yet operative changes to the respective Procedure and 
specifying the applicable section or sections that would be amended by 
the proposed rule change. The legend would state that such changes 
would be operative by July 14, 2017, but if such changes become 
operative before July 14, 2017, NSCC would notify Members by Important 
Notice 30 days before the actual implementation date. The legend would 
also state that underlined and boldface text indicates new text and 
strikethrough and boldface text indicates deleted text. Additionally, 
the legend would include a reference to the file number of the proposed 
rule change and would state that once operative, the legend would 
automatically be removed from the Rules, and the formatting of the text 
of the changes in the applicable section or sections would 
automatically be revised to reflect that these changes have become 
operative.
2. Statutory Basis
    Section 17A(b)(3)(F) of the Securities Exchange Act of 1934, as 
amended (``Act'') requires, in part, that the Rules be designed to 
promote the prompt and accurate clearance and settlement of securities 
transactions and to protect investors and the public interest.\11\
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    \11\ 15 U.S.C. 78q-1(b)(3)(F).
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    NSCC believes that the proposed rule changes are consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to NSCC, in particular Section 17(A)(b)(3)(F), because NSCC 
believes that the proposed rule changes would promote the prompt and 
accurate clearance and settlement of securities transactions in 
furtherance of the Act.\12\ Specifically, by updating the CTS to 
provide more details and information in one common file layout, the 
proposal would provide Members with more transparency and clarity 
regarding their trade obligations, which would help with reconciliation 
(including, for example, reconciliation of trades for settlement). 
Furthermore, Members would continue to receive the CTS three times a 
day, but would receive the CTS in a more user-friendly format (i.e., 
CSV) in addition to the current MRO format. With the new online query 
tool, Members would also be able to access trade obligation information 
that has been distributed in prior CTSs and customize searches of trade 
obligation information according to their needs. Therefore, NSCC 
believes that these changes to the CTS would make it a more effective 
tool for Members to manage their trade obligations and any associated 
risks, facilitating the protection of investors and the public

[[Page 96149]]

interest from such risks and also promoting the prompt and accurate 
clearance of securities transactions.
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    \12\ Id.
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    NSCC believes that the proposed rule changes associated with the 
Foreign Security Accounting Operation also would promote the prompt and 
accurate clearance and settlement of securities transactions in 
furtherance of the Act.\13\ Specifically, the proposed rule change 
would address the timing mismatch between the receipt of the CTS by 
Members and the settlement of Foreign Securities trades in the local 
markets by Members by discontinuing the practice of re-pricing Foreign 
Securities at the uniform Settlement Prices. This change also would 
eliminate the possibility of a cash adjustment due to re-pricing and 
the associated risk that a solvent Member could be liable for the cash 
adjustment if its counterparty defaults because the cash adjustment is 
not guaranteed by NSCC. Therefore, NSCC believes that the proposed rule 
change would promote the prompt and accurate clearance and settlement 
of securities transactions in furtherance of the Act.\14\
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    \13\ Id.
    \14\ Id.
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    Additionally, the proposed rule changes to (i) revise the CTS-
related terminology and to make the conforming language changes to the 
affected provisions in the Rules associated with the CTS and (ii) 
correct certain Rules, which have been described in detail above, would 
provide technical accuracy and additional clarity to Members, thereby 
also promoting the prompt and accurate clearance and settlement of 
securities transactions, consistent with Section 17A(b)(3)(F) of the 
Act.\15\
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    \15\ Id.
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(B) Clearing Agency's Statement on Burden on Competition

    NSCC does not believe that the proposed rule changes associated 
with the CTS would impose any burden on competition that is not 
necessary or appropriate in furtherance of the Act, as described 
above.\16\ While the proposed rule changes relating to the CTS would 
require Members to make technological changes and thereby incur costs 
in doing so that may burden the Member competitively, the proposed rule 
changes have been structured to better meet the needs of Members. 
Specifically, the proposed rule changes associated with the CTS would 
meet Members' needs by revising the terminology in the Rules to be 
simpler, modifying the layout of the CTS to be clearer, and providing 
users with more information and transparency. In addition to continuing 
to receive the CTSs three times a day, Members would be able to access 
CTS information by using the online query tool. Moreover, the proposed 
rule changes associated with the CTS are appropriate in that such 
changes reflect Members' feedback. Consequently, NSCC believes that any 
burden on competition derived from the proposed rule changes would be 
necessary and appropriate in support of the beneficial objectives of 
the improvements in the CTS, which would be made in furtherance of the 
Act, as described above. Moreover, NSCC believes any such burden on 
competition derived from the proposed rule changes would not be 
significant because Members have requested these changes and were 
involved in developing the business requirements.
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    \16\ 15 U.S.C. 78q-1(b)(3)(I).
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    NSCC does not believe that the proposed changes associated with the 
Foreign Security Accounting Operation would have any impact on 
competition. These changes do not require Members to make any coding 
changes or incur costs. Members would continue to accept output from 
NSCC associated with their activity in the Foreign Security Accounting 
Operation as they do today with the difference being that this output 
would no longer reflect the re-pricing discussed in detail above.

(C) Clearing Agency's Statement on Comments on the Proposed Rule Change 
Received From Members, Participants, or Others

    NSCC has not received or solicited any written comments relating to 
this proposal. NSCC will notify the Commission of any written comments 
it receives.

III. Date of Effectiveness of the Proposed Rule Change, and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form
    (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NSCC-2016-008 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549.

All submissions should refer to File Number SR-NSCC-2016-008. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of NSCC and on 
DTCC's Web site (http://dtcc.com/legal/sec-rule-filings.aspx). All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NSCC-2016-008 and should be 
submitted on or before January 19, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31472 Filed 12-28-16; 8:45 am]
 BILLING CODE 8011-01-P